Feature Highlight

Speech as prepared for delivery by Tao Zhang, IMF Deputy Managing Director, at the BRICS Summit, South Africa, July 24, 2018

Introduction

Ladies and gentlemen - good afternoon.

It is an honour to be in South Africa for the BRICS Summit. I would like to thank Caixin for hosting this important panel on securing inclusive growth in Africa.

Africa is a continent that holds immense opportunity. It has a huge demographic dividend, plenty of natural resources, and untapped potential in many sectors. Countries in the region have made considerable progress in development, but the job is not over.

In my remarks, I will focus on the priorities for ensuring sustainable development. And, make no mistake, the number one economic priority for Africa is development. This means further improvement in living standards, growth that is inclusive, and sustainable financing from its partners.

I. Global context – recovery becoming more uneven

Let me start with the global outlook. We recently released our growth forecasts for the world economy.

Global growth is projected at 3.9 percent in 2018 and 2019, in line with our April forecasts. But the expansion is becoming less even, and its rate appears to have peaked in some major advanced economies.

In the United States, growth continues apace at 2.9 percent this year and 2.7 percent in 2019. However, momentum in the euro area, Japan, and the United Kingdom is weaker than we anticipated six months ago.

Growth in emerging and developing economies is expected to remain strong at 4.9 percent this year and 5.1 percent in 2019.

Sustained momentum is expected to be seen in this region as well. Overall growth in sub-Saharan Africa is projected at 3.4 percent this year, rising to 3.8 percent next year. With growth rates exceeding those of population, many countries should see increases in per capita incomes.

Yet even among this dynamic group of emerging economies, growth prospects are becoming more uneven. Rising oil prices, escalating trade tensions, higher yields in the United States, and market pressures on emerging markets' currencies are challenging the outlook. Think of the recent experience of Turkey or Argentina.

These challenges are likely to persist, and this is why we see rising downside risks to the outlook even in the near term. An escalation in trade tensions can derail the global recovery and further depress medium-term growth.

At the same time, financial conditions remain accommodative. Spreads are still compressed, valuations in some markets stretched, and volatility low. However, these conditions can change suddenly. Countries with higher debt could be especially affected by tightening in global financing conditions.

Clearly, the global backdrop is challenging for the sub-Saharan Africa region. This provides more urgency for policies to lock in recent achievements and provide opportunity to all its citizens.

II. Sub-Saharan Africa – significant progress

Before we look at how to secure a brighter future for the region, let's step back for a moment to see how far it has come. Over the last two decades, the region has made great progress in improving economic and social conditions.

For instance, real per capita incomes have risen 50 percent on average in the region. Importantly, per capita income doubled in Mozambique, Angola and Rwanda, and tripled in Ethiopia. These are remarkable gains.

At the same time, infant mortality rates fell dramatically – from 108 to 55 per 1000 live births for the region as a whole. Countries like Angola, Malawi, Liberia and Rwanda saw the largest improvements.

During this period, growth was supported by reforms and improved macroeconomic policies. It also benefited from a boom in commodity prices that helped commodity exporters, and increased trade and investment flows.

These are great achievements, yet much more is needed. The region needs to create sustained, strong and inclusive growth to achieve the UN Sustainable Development Goals and reap the demographic dividends.

Africa is the youngest continent in the world. This is both a challenge and an opportunity.

By 2035, the number of sub-Saharan Africans reaching working age of 15-64 years will exceed the rest of the world combined – adding about 110 million workers. This is a trend with potentially significant implications for both the region and the world, in terms of new markets and investment opportunities.

Yet realizing the full potential of these demographic trends means creating 20 million jobs every year through 2035. This is twice the average number of jobs created every year during 2011-2017.

III. Unleashing opportunity in Africa – the way forward

So how can the region capitalize on its demographic potential to attain the SDGs and achieve higher and more inclusive growth?

In my view, this will require upholding the multilateral spirit of cooperation by all parties involved. Countries in the region should do their part by getting their house in order; and development partners should help by ensuring 'sustainable' sources of financing.

What does this mean in practice? For countries in the region, it means reducing macroeconomic vulnerabilities and raising growth potential. And here I see two important priorities. One for the short term; the other for the long term.

The first priority is to reduce vulnerabilities from debt. It is urgent. Public debt ratios have increased markedly over the past five years – from an average of 30 percent of GDP to over 50 percent currently.

In some countries, the increase in debt is driven by development and infrastructure needs. In other countries, it reflects the impact of the large decline in oil prices in 2014. And in others, it was the migration of off-balance sheet liabilities to the public sector.

If the growing debt trends in Africa continue, rising interest costs from higher debt would divert resources away from education, health and infrastructure.

The priority therefore is to reduce vulnerabilities from debt. The emphasis should be on domestic revenue mobilization and improved debt management. This will create space for investment in physical and human capital and social spending.

Many countries in the region have seen significant improvements in collections. Tax revenues are above the tipping point of 13 percent of GDP in two-thirds of the countries, compared to just one-third in 1995. Still, this leaves more than 16 countries with less than 13 percent of GDP in tax revenue.

At the same time, oil exporters have seen a sharp decline in their revenue intake, from 31 percent of GDP in 2012 to 18 percent in 2016. Clearly, the emphasis on domestic revenue mobilization needs to be sustained.

The second priority to raise long-run growth is to revive private investment.

For many years, low levels of private investment were offset by public expenditures. Yet, faced with growing public debt vulnerabilities, it is unclear how long this trend can continue. Some countries have pursued public-private partnerships, but these efforts have had varying success.

At the same time, initiatives such as China's Belt and Road Initiative and the G20 Compact with Africa provide an opportunity to support private investment. This includes institutional reforms that can encourage foreign direct investment and support public-private partnerships.

But for these initiatives to be effective, sub-Saharan African countries should ensure a transition from public to private investment. This requires maintaining macroeconomic stability and improving regulatory and insolvency frameworks. It also means increasing intra-African trade and deepening access to credit.

Here, Africa can offer the world important lessons on financial inclusion. We have recently published a paper that pulls together lessons from 16 pilot countries in Africa on policies to expand access to credit.

Facilitating this handover from public to private investment also requires alternative, non-debt creating ways of financing the region's large infrastructure needs. By some estimates (AfDB), these needs amount to US$130-170 billion per year. Such financing should minimize risks to economies in the region.

Conclusion

There is tremendous potential to catalyze private funds for infrastructure investment. And longer-term, non-debt creating capital investment will not only help address the infrastructure needs of the region. It will also deepen capital markets, promote further trade integration, and provide significantly higher returns to incremental capital.

The IMF will continue to support the continent in these development efforts through policy advice, capacity building, and financial support where needed. We will also collaborate with other international financial institutions and development partners to support the region in realizing its demographic potential, and achieving sustained and more inclusive growth.